RBI Keeps Repo Rate Unchanged at 4%; Increases Transaction Limit to Rs5 Lakh for Retail Direct Scheme
Moneylife Digital Team 08 December 2021
The monetary policy committee (MPC) of the Reserve Bank of India (RBI) has decided to keep policy rates unchanged in its December review. Due to this, the repo rate under the liquidity adjustment facility (LAF) would remain unchanged at 4% and the reverse repo rate at 3.35%. With no change in policy rates, the marginal standing facility rate and bank rate remain at 4.25%. RBI also decided to enhance the transaction limit to Rs5 lakh from Rs2 lakh for payments through unified payments interface (UPI) for the retail direct scheme for investment in government securities (G-secs) and initial public offering (IPO) applications. 
 
In his video address, RBI governor Shaktikanta Das says, “Based on an assessment of the macroeconomic situation and outlook, the MPC voted unanimously to maintain status-quo about the policy repo rate and by a majority of 5 to 1 to retain the accommodative policy stance. Consequently, the policy repo rate remains unchanged at 4%, and the stance remains accommodative as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward.”
 
According to the RBI governor, the recovery of aggregate demand hinges on private investment, which is still lagging. He says, “The MPC regarded the accentuation of headwinds emanating from global developments as the main risk to the domestic outlook, which is now somewhat clouded by the Omicron variant of COVID-19. Moreover, given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery.” 
 
Noting that economic activity is broadly evolving in line with its assessment in October, the MPC believed that the sharp and sustained reduction in new COVID-19 infections and the rise in vaccination coverage are contributing to consumer confidence and business optimism. The prospects for economic activity are steadily improving, including for contact-intensive services that were hit hard by the pandemic. 
 
The MPC also noted the supply-side measures taken by the government to contain food prices as also the calibrated reductions in central excise duties and state value-added taxes (VAT) on petrol and diesel. Crude oil prices have also softened since end-November. These would alleviate, to an extent, the domestic cost-push build-up, the governor says.
 
As a step towards rebalancing the liquidity surplus, Mr Das, the governor says, RBI has decided to provide one more option to banks to prepay the outstanding amount of funds availed under the targeted long-term repo operations (TLTRO 1.0 and 2.0) announced on 27th March and 17 April 2020. He added that banks already prepaid Rs37,348 crore in November 2020, which amounted to about one-third of Rs1,12,900 crore availed under the scheme.
 
The on-tap liquidity windows of Rs50,000 crore for ramping up COVID related healthcare infrastructure and services and Rs15,000 crore for specific contact-intensive sectors will continue till their terminal date of 31 March 2022.
 
Taking cognizance of the reasonableness of various charges incurred by customers for digital payments through credit cards, debit cards, prepaid payment instruments (cards and wallets), and UPI, the RBI has decided to come out with a discussion paper. 
 
“It is proposed to release a discussion paper on various charges in the payment system to have a holistic view of the issues involved and possible approaches to mitigating the concerns to make digital transactions more affordable,” the governor says.
 
Further, the central bank has decided to launch UPI-based payment products for feature phone users, leveraging innovative products from the RBI’s regulatory sandbox on retail payments. RBI will also make the process flow for small value transactions simpler through a mechanism of ‘on-device’ wallet in UPI applications; and enhance the transaction limit to Rs5 lakh from Rs2 lakh for payments through UPI for the retail direct scheme for investment in G-secs and initial public offering (IPO) applications.
 
At present, interest rates on external commercial borrowing (ECB) and trade credits are benchmarked to LIBOR or any other interbank rate applicable to the currency of borrowing. RBI says, “As we transition away from LIBOR, guidelines enabling the use of any widely accepted interbank rate or alternative reference rate (ARR) for such transactions are being issued separately.”
 
“The Indian economy is relatively well-positioned on the path of recovery, but it cannot be immune to global spillovers or to possible surges of infections from new mutations, including the Omicron variant. Hence, fortifying our macroeconomic fundamentals, making our financial markets and institutions resilient and sound, and putting in place credible and consistent policies will assume the highest priority in these uncertain times,” RBI governor Das concluded.
 
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